OK Patch. Listen up. Positive article in LA Times . . .
After Jimmy Rodgers touted oil this morning, my ears
perked up (they always seem to do that when I hear
comforting news). Then I saw this -
Friday, June 12, 1998
There's Gloom in the Oil Patch, So It's Time to Buy
Energy: Stocks have fallen in line with price of crude, but historically they've always recovered.
Supply 'glut' has been exaggerated.
By JOHN DORFMAN
Oil stocks are unpopular today, with crude oil prices down in
the scary zone around $13 a barrel. That's why this is a
good time to buy.
In saying this, I'm not a disinterested party. My firm has a sizable
holding in big oil stocks such as Amoco Corp., Atlantic Richfield
Co. and Texaco() Inc. We also bought some
oil-service companies this year.
While I may not be objective, I believe I'm right. Today's
oil-price weakness isn't unprecedented. In the past 12 years, there
were four other times when oil prices dipped below $15 a barrel.
They were the full year of 1986, August through December of
1988, June 1990 and December 1993 through April 1994.
I think that the current spell of price weakness, too, shall pass.
Oil prices were in the range of $20 to $22 a barrel when the
Asian economic crisis erupted in October. They fell rapidly and
steadily until March, when they dropped below $15. Since then,
they have been crisscrossing the $15 line. In the past couple of
days, they have crossed the $13 level.
Past periods of price weakness were a great time to buy
oil-service stocks and not a bad time to buy the big, integrated oil
companies: Exxon Corp., Royal Dutch Petroleum Co., Mobil
Corp., Chevron Corp., Amoco and Texaco.
Simmons & Co. International is a small brokerage house in
Houston that specializes in oil-service stocks. It looked at the
performance of these shares during the 12-month periods following
the end of each period of weakness in crude oil prices.
On average, Simmons found, oil-service stocks gained 37%
during these snap-back periods. That was 1.8 times the gain in the
Standard & Poor's 500 index, which was 21% on average. In its
measurement, Simmons used Schlumberger, Halliburton Co., Baker
Hughes Inc. and Global Marine() Inc. as proxies
for the oil-service group.
Service stocks get clobbered when oil prices are weak because
people fear that oil producers will slash their exploration and
production budgets.
Buying these stocks on weakness may be a great long-term
move, though in today's climate hardly anyone dares to do it. "It's
not like trying to catch a falling knife. It's like trying to catch a knife
that's being thrown at you," said Wesley Maat, an oil-service
analyst at Deutsche Bank Securities Inc.
Stocks of the integrated oil companies don't rally as
dramatically, but then these companies are steadier on the
downside. Because they refine and market oil products, as well as
explore for oil and produce it, the big, integrated companies are
only moderately sensitive to the price of oil.
What I like about the biggies is that they would probably be
bastions of strength, compared with most stocks, in a market
decline. Their dividend yields, while unimpressive by the standards
of the past, look large by comparison to today's puny average of
1.4% on the S&P 500 stocks. Exxon, for example, yields 2.4%,
Mobil 3% and Texaco 3.1%. High-yielding stocks traditionally do
better than most in market declines.
In addition, energy stocks tend to move in their own long cycles,
which are fairly independent of movements in the major U.S. stock
indexes. With stock prices higher by most measures than ever in
history--compared with underlying measures of value--lack of
correlation to the overall market could be a virtue.
Of course, I wouldn't be a partisan of energy stocks if I thought
oil was going to be selling for less than $15 a barrel for several
years. I expect it to rise back into the $17 to $20 trading range that
has characterized most of the past decade.
The supply-and-demand picture for oil is better than many
people think. You hear a lot of talk about a "glut" of oil or about the
world being "awash in oil." I think those phrases are exaggerations.
You may hear estimates that the world produces 76 million
barrels of oil a day and uses only 74 or 75 million. The exact
numbers vary with the estimators. But I'd take such
pronouncements with a grain of salt.
If that were the case, wouldn't world inventories of oil be rising
dramatically? In a conference call last week, Dan Pickering,
director of research at Simmons, said there has been no big buildup.
Oil inventories can be measured fairly precisely, he said, and they
are up only 66 million barrels in the past four quarters in the major
industrial countries. That's far less than the volume that should be
accumulating according to many supply-and-demand estimates.
Pickering suspects that those estimates are too gloomy.
You hear that anticipated weak demand from Asia explains the
big decline in oil prices since October. Really? Asia and the Pacific
region (including Japan and China) use about 20 million barrels a
day, or about 27% of the world's total. So if Asian demand fell
10%, it would nick total demand by 2.7%.
Does that explain a 30% drop in oil prices? Only when you stir
in a large dose of investor psychology.
Many of the things people use oil for--home heating and power
generation, for example--are not highly discretionary. The fact is,
most people will give up the country club, the new suit or the new
computer long before they will choose to keep their house chilly.
They may drive less--fewer vacations, for example--and therefore
use less gasoline. But much of their driving is for commuting or
necessary errands and won't be cut back.
As for supply, the once-feared Organization of Petroleum
Exporting Countries is now regarded as a toothless tiger. I think
people may be underestimating OPEC's power today, just as they
greatly overestimated it 20 years ago.
* * *
John Dorfman, a Boston-based money manager with Dreman
Value Management in Red Bank, N.J., writes regularly for
Bloomberg News. The opinions expressed are his and don't
represent those of Bloomberg News. His firm or its clients may own
or trade investments discussed in this column.
* * *
Cheap Oil
Crude oil futures fell 5% to its lowest level in almost a decade
Thursday, on expectations that recent output cuts pledged by
exporting nations will not be enough to overcome a worldwide glut.
Generic oil futures, monthly closes and latest:
Thursday close: $12.75
Source: Bloomberg News
- - -
John Dorfman, a Boston-based Money Manager With Dreman
Value Management in Red Bank, N.j., Writes Regularly for
Bloomberg News
latimes.com
Hang in there guys and gals. |
